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Management uses Interest Sensitivity Simulation Analysis (“Simulation”) to measure the sensitivity of projected earnings
to changes in interest rates. The Simulation model projects net interest income and interest rate risk for a rolling two-year
period of time. Simulation takes into account the current contractual agreements that BB&T has made with its customers
on deposits, borrowings, loans, investments and commitments to enter into those transactions. Furthermore, the
Simulation considers the impact of expected customer behavior. Management monitors BB&T’s interest sensitivity by
means of a model that incorporates the current volumes, average rates earned and paid, and scheduled maturities and
payments of asset and liability portfolios, together with multiple scenarios of projected prepayments, repricing
opportunities and anticipated volume growth. Using this information, the model projects earnings based on projected
portfolio balances under multiple interest rate scenarios. This level of detail is needed to simulate the effect that changes
in interest rates and portfolio balances may have on the earnings of BB&T. This method is subject to the accuracy of the
assumptions that underlie the process, but management believes that it provides a better illustration of the sensitivity of
earnings to changes in interest rates than other analyses such as static or dynamic gap. In addition to Simulation analysis,
BB&T uses Economic Value of Equity (“EVE”) analysis to focus on changes in capital given potential changes in interest
rates. This measure also allows BB&T to analyze interest rate risk that falls outside the analysis window contained in the
Simulation model. The EVE model is a discounted cash flow of the entire portfolio of BB&T’s assets, liabilities, and
derivatives instruments. The difference in the present value of assets minus the present value of liabilities is defined as the
economic value of BB&T’s equity.
The asset/liability management process requires a number of key assumptions. Management determines the most likely
outlook for the economy and interest rates by analyzing external factors, including published economic projections and
data, the effects of likely monetary and fiscal policies, as well as any enacted or prospective regulatory changes. BB&T’s
current and prospective liquidity position, current balance sheet volumes and projected growth, accessibility of funds for
short-term needs and capital maintenance are also considered. This data is combined with various interest rate scenarios to
provide management with the information necessary to analyze interest sensitivity and to aid in the development of
strategies to reach performance goals.
The following table shows the effect that the indicated changes in interest rates would have on net interest income as
projected for the next twelve months assuming a gradual change in interest rates as described below. Key assumptions in
the preparation of the table include prepayment speeds of mortgage-related assets, cash flows and maturities of derivative
financial instruments, loan volumes and pricing, deposit sensitivity, customer preferences and capital plans. The resulting
change in interest sensitive income reflects the level of sensitivity that interest sensitive income has in relation to changing
interest rates.
Table 30
Interest Sensitivity Simulation Analysis
Annualized Hypothetical
Percentage Change in
Net Interest Income
Interest Rate Scenario
Linear Prime Rate
Change in December 31, December 31,
Prime Rate 2011 2010 2011 2010
2.00 % 5.25 % 5.25 % 3.92 % 4.19 %
1.00 4.25 4.25 2.27 1.97
No Change 3.25 3.25 — —
(.25) 3.00 3.00 (.55) (.34)
The Market Risk and Liquidity Committee has established parameters measuring interest sensitivity that prescribe a
maximum negative impact on net interest income of 2% for the next 12 months for a linear change of 100 basis points
over four months followed by a flat interest rate scenario for the remaining eight month period, and a maximum negative
impact of 4% for a linear change of 200 basis points over eight months followed by a flat interest rate scenario for the
remaining four month period. In the event that the results of the Simulation model fall outside the established parameters,
management will make recommendations to the Market Risk and Liquidity Committee on the most appropriate response
given the current economic forecast. Management currently only modeled a negative 25 basis point decline because larger
declines would have resulted in a Federal funds rate of less than zero.
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